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Everyone has advice for startup founders during tax season; here are some facts vs. fiction of the R&D tax credit.
You’re feeling unsure if you should be studying up on tax credits. Tax season is always overflowing with things to do, and you’ve had friends, fractional CFOs, and others tell you not to waste your time looking into tax credits. Time is precious, but then again: how many ways do you know to make up to $250,000 in less than an hour? That’s what an R&D tax credit can be worth to a startup, so maybe it’s time to reconsider putting this off.
The tax code is endlessly confusing, but we at Neo.Tax love to get into the weeds (I know, it’s odd, but it’s what we do!). So, you’ve heard myths and rumors about the tax code — we’re here to sort the facts from the fictions.
FICTION: My accountant says my startup is too small or too early to claim the R&D credit
FACT: In 2016, Congress changed the R&D tax credit so that companies that have had less than 5 years of revenue (even pre-revenue companies!) can use the R&D credit against payroll taxes, instead of income taxes. That means even startup companies with losses can use the credit, as long as they are doing research to create a new or improved product for their business!
FICTION: It’s fine to wait until later and just amend your tax filing to claim the R&D credit
FACT: The “original” R&D credit (which only offset future taxable income) could be claimed on amended returns, so many accountants used to delay a study until a company was about to be profitable. However, the new “payroll” R&D credit can only be claimed on an original, timely-filed return (including extensions). Once it is claimed on the return, you can begin offset payroll taxes starting the quarter after that return is filed, so it doesn’t make sense to wait!
FICTION: Your company isn’t profitable, so don’t even consider claiming the R&D credit
FACT: The R&D payroll tax credit refunds payroll taxes not income taxes, so you don’t need to wait until you’re profitable. The Payroll R&D credit refunds 6.25% of qualifying gross payroll expenses starting the quarter after you file with your federal tax return! In layman's terms that means when applying the credit to payroll taxes, you’ll see about a 6.25% drop in your company-wide payroll costs until the credit is fully utilized!
FICTION: R&D Studies are cumbersome, time-consuming and a hassle to complete
FACT: When people think of R&D Studies, they think of the traditional multi-year studies conducted for multinational companies for the original R&D Tax credit. But the R&D Payroll Tax Credit was designed for “qualified small businesses” that tend to be under 5 years of age, so the process is much more straightforward. With Neo.Tax, the process has never been easier — the founder can complete most questions online in less than 20 minutes and have their filing ready to go. We simplified and streamlined the process so startups can get the money they’re owed!
FICTION: I don’t have enough time before April 15 to file for this credit
FACT: Completing the R&D Payroll Tax Credit can take under an hour when doing it with Neo.Tax. If you don’t have an hour, have your accountant file an extension on your taxes. You can submit your claim with the return you file after the extension. As any founder knows, money doesn’t grow on trees — but 10% of your engineering salaries returned is the easiest way to extend your runway!
Go to Neo.Tax to find out how much the IRS owes you!